UK investor Joe Lewis cut a sorry figure in a Manhattan court on Wednesday as he made a guilty plea to a charge of insider trading. Lewis admitted passing non-public information about publicly traded companies to two of his private jet pilots and a former girlfriend, adding that he knew at the time that what he did was wrong, and he was embarrassed.
Behind the public show of contrition, Lewis and his lawyers may have struck a decent plea deal. He waived his right to appeal unless he receives a prison sentence when he returns to court in March, and a $50 million penalty to be paid by one of his companies may seem like a cheap price to pay for a billionaire who generated enough money from currency trading to buy Tottenham Hotspur Football Club, which is still owned by a related trust.
But the insouciant way in which Lewis and his lawyers initially dismissed the insider-trading charges when they were made last year has now been replaced by a rueful admission that the federal authorities were right.
They are, however, flirting with a risky and untested strategy that would replace the old trading adage that ‘you don’t fight the Fed’ with a new regulatory twist that ‘you might sue the Fed’
The Wall Street bankers who are considering an unprecedented legal assault on the US Federal Reserve to delay or prevent the planned implementation of Basel III capital rules are not planning to break the law, of course.
They are, however, flirting with a risky and untested strategy that would replace the old trading adage that 'you don’t fight the Fed' with a new regulatory twist that 'you might sue the Fed'.
That approach is not just untested, it also creates enormous potential downside for banks that have been clear beneficiaries of the higher capital requirements that were introduced in the US after the 2008 financial crisis.
To use another Wall Street trading cliche, there is an unwelcome asymmetry in openly challenging the Fed’s authority.
Regulators might be forced to amend their capital proposals, but there would be plenty of scope for retribution when an individual bank or a group of firms next makes a reputational mistake.
And casting doubt on the ability of US regulators to play a decisive role in ensuring that markets are orderly is unlikely to be good for the long-term value of big banks.
Trump uncertainty
The prospect of a second presidential election victory for Donald Trump is already becoming one of the main themes of 2024. That in itself could inject a high degree of uncertainty for markets.
Trump recently proposed a 10% charge on all imports, for example, in a policy that would challenge existing trading and supply-chain relationships.
Wall Street banks thrive when there is a certain amount of market volatility, but not so much that trust in counterparties is undermined.
A fractured relationship between banks and their regulators would increase the chance that volatility could transform into market fragility.
There is also a risk that a second Trump administration could seek to install political loyalists in many federal agencies in an attempt to undermine the supposed 'deep state'.
Trump himself could certainly be expected to renew pressure on the Fed to keep interest rates low.
Wall Street leaders presumably know that they are associating with ideologically driven opponents of many aspects of regulation in the US as they seek to delay or prevent the proposed Basel III implementation.
They should also be able to remember the popular anger against big banks – and individual bankers – in the wake of the 2008 crisis.
When the next serious market upheaval arrives, a policy of belligerence towards regulators might look like a Wall Street trade that delivers nominal short-term gains that are vastly outweighed by long-term losses.
